Ram Chandra Traders Private Limited vs M/s. Sudha Siva Traders Pvt. Ltd

Anil Kumar B, Member (Technical)

Under adjudication, is an Application filed by M/s. Ram Chandran Traders Private Limited, (hereinafter referred as "Financial Creditor") under Section 7 of Insolvency and Bankruptcy Code, 2016 seeking initiation of Corporate Insolvency Resolution Process (CIRP) against the Corporate Debtor, namely, M/s. Sudha Siva Traders Private Limited (hereinafter referred as "Corporate Debtor").

From Part-I of the Application, it is seen that the Applicant is a Private Limited Company. Part-II of the Application, discloses the details in relation to the Corporate Debtor, from which, it is seen that the Corporate Debtor is a company incorporated on 20.03.1995 with CIN: U51909TN2011PTC083725 and the Registered Office address of the Corporate Debtor as per the Application is stated to be situated at No.602, Lakshmipuram, Sembarambakkam, Chennai - 602 103. From Part-Ill of the Application, it is seen that the Financial Creditor has proposed the name of one Mr. Swaminathan Prabhu, as the Interim Resolution Professional (IRP).

Part-IV of the Application, sets out the details of the financial debt, from which, it is seen that the Corporate Debtor has claimed a sum of Rs.35,48,240/- and interest @ 18% per annum.

Part-V of the Application, lists out the details of the documents filed by the Financial Creditor in support of the claim, which are as follows:

a. Working Sheet

b. Agreement

Learned Counsel for the Financial Creditor submitted that the Financial Creditor and the Corporate Debtor have entered into a Memorandum of Agreement on 31.03.2019 in and by which, the amount to the tune of Rs.35,48,240/- was crystallized as the amount which is due and payable by the Corporate Debtor on account of supply of materials by the Financial Creditor and that the parties have mutually converted the said amount as "unsecured loan" which is required to be repaid in 12 months equal instalments commencing from 01.11.2019 to 31.10.2020.

The Learned Counsel for the Financial Creditor submitted that as per the agreement, the Financial Creditor is entitled to claim interest at the rate of 18% p.a. on the default amount if the Corporate Debtor has failed to repay the amount on the actual date of payment. Further, it was submitted by the Learned Counsel for the Financial Creditor that the Corporate Debtor has committed default in repayment of the said amount to the Financial Creditor on the due date and hence the Financial Creditor has filed the present Application seeking thereof to initiate Corporate Insolvency Resolution Process (CIRP) as against the Corporate Debtor.

The Memorandum of Agreement dated 31.03.2019 entered into between the parties is captured herewith;

The Respondent has filed counter and it is seen that the Respondent has admitted its liability, however expressed its inability to repay its outstanding debt. Further, it is averred in the counter that the Financial Creditor has failed to establish 'financial debt' in terms of Section 5(8) of IBC, 2016.

Heard the submissions made by the Learned Counsel for both the parties. This Adjudicating Authority before passing an order of admission under Section 7 of IBC, 2016 is required to be satisfied

that the Applicant is a 'Financial Creditor' and there exists a 'financial debt' and that the Corporate Debtor should have made 'default' in repayment of such 'financial debt'. Only if the above conditions are satisfied, this Adjudicating Authority can initiate Corporate Insolvency Resolution Process against the Corporate Debtor.

As to the facts of the present case, the cause of action for the Applicant to file the present Application stems from the Memorandum of Agreement dated 31.03.2019. As per the recitals of the said Agreement, it is manifestly made clear that the Financial Creditor has supplied steel and allied products to the Corporate Debtor and that the Corporate Debtor has not paid the outstanding dues and the parties hereto have entered into an Agreement to convert the said amount into an unsecured loan.

Hence under such a circumstances, the question which is required to be decided by this Adjudicating Authority is that, whether the Memorandum of Understanding as entered into between the parties on 31.03.2019 would partake the character of a 'financial debt' as defined under Section 5(8) of IBC, 2016 which is extracted hereunder;

(8) "financial debt" means a debt along with interest, if any, which is disbursed against the consideration for the time value of money and includes-

(a)  money borrowed against the payment of interest;

(b)  any amount raised by acceptance under any acceptance credit facility or its de-materialised equivalent;

(c)  any amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock or any similar instrument;

(d)  the amount of any liability in respect of any lease or hire purchase contract which is deemed as a finance or capital lease under the Indian Accounting Standards or such other accounting standards as may be prescribed;

(e)  receivables sold or discounted other than any receivables sold on non-recourse basis;

(f)  any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing;

Explanation. -For the purposes of this sub-clause, -

(i)  any amount raised from an allottee under a real estate project shall be deemed to be an amount having the commercial effect of a borrowing; and

(ii)  the expressions, "allottee" and "real estate project" shall have the meanings respectively assigned to them in clauses (d) and (zn) of section 2 of the Real Estate (Regulation and Development) Act, 2016 (16 of 2016);

(g)  any derivative transaction entered into in connection with protection against or benefit from fluctuation in any rate or price and for calculating the value of any derivative transaction, only the market value of such transaction shall be taken into account;

(h)  any counter-indemnity obligation in respect of a guarantee, indemnity, bond, documentary letter of credit or any other instrument issued by a bank or financial institution;

(i) the amount of any liability in respect of any of the guarantee or indemnity for any of the items referred to in sub-clause (a) to (h) of this clause;

From the above definition, it is seen that for a Financial Creditor to qualify to file an Application under Section 7 of IBC, 2016, they have to satisfy that there is a 'financial debt' as extracted above. From the recitals made in the Memorandum of Understanding dated 31.03.2019, it is seen that the Financial Creditor has supplied steel and allied products to the Corporate Debtor and the amount which is due and payable as against supply of steel and allied products have been converted in the form of an "Unsecured Loan". Thus, it is seen the Applicant has made an attempt to convert the "operational debt" into a "financial debt" by way of a Memorandum of Understanding.

Thus, after perusing the documents filed along with the Application and in view of the discussions made supra, we are of the view that the Memorandum of Understanding dated 31.03.2019 entered into between the parties, does not entitle to treat the Applicant as a "Financial Creditor" and also the 'debt' of the Applicant does not qualify to be an 'financial debt' under Section 5(8) of IBC, 2016 and in such a circumstances, the Application filed by the Financial Creditor is required to be dismissed and accordingly stands dismissed. No costs.